Trillion Dollar Stock Buybacks

Alan Zendell, December 17, 2018

With a couple of business weeks still to go in 2018, corporate stock buybacks have already passed $1,000,000,000,000 (that’s one trillion dollars) for the year. That’s the same amount that our national deficit is predicted to exceed in 2019, because of the 2017 Tax Cuts and Jobs Act. Is that a coincidence?

Let’s examine the question in simple terms, free of politics and hype. “The immediate effects of a tax cut are a decrease in the real income of the government and an increase in the real income of those whose tax rates have been lowered.” If government revenue drops and spending is not reduced, deficits rise. It’s just like what happens to you and me if we take a pay cut while our cost of living stays the same – our credit balances (debts) rise and/or our savings (cash reserves) decrease.

What about buybacks? Buybacks are corporate repurchases of a company’s own stock. There are multiple reasons that companies do this, but in general, the motivation is to reduce the number of outstanding shares in the marketplace. All other things being equal, the demand created by the buyback itself and that fact that fewer shares are available afterward usually increase stock prices, which proportionally increases the perceived value of the corporation.

Beyond increasing corporate wealth, the company benefits financially from buybacks in other ways. Investors pay close attention to corporate returns on investment. Since cash is a corporate asset, when a company uses available cash for a stock buyback its total asset value decreases, which increases its Return on Assets. Similarly, when a buyback reduces the number of shares in the marketplace, there is less outstanding equity, so the Return on Equity increases too.

How does that link buybacks and tax cuts? When the tax bill was debated in Congress and hyped by The White House, its supporters focused on the short term benefits to individual taxpayers and forecast that companies would invest the tax windfall in efforts to create jobs for Americans. Most economists estimate that about 85% of the benefit of the 2017 tax cuts was realized by corporations, and over the next eight years that percentage will increase as the individual income tax cuts are phased out.

While some companies (Apple, JP Morgan) used billions in tax savings to create new jobs and increase charitable contributions, most (Cisco, Pfizer, Amgen, and Coca-Cola to name a few) used their cash windfalls for stock buybacks and increased dividends to shareholders. There’s no way to compute exact amounts, but what that adds up to is huge benefits for investors and corporate balance sheets.

Those aren’t bad things in themselves, but they’re also not free. Conservatives in Congress have used a pay-as-you-go mantra for decades, but the 2017 tax law completely reversed that. Its huge corporate benefits came with a price tag. Someone has to pay the bill, and as of now that someone looks like our children and grandchildren.

The significance of all that goes beyond who benefits from tax cuts – there’s a much broader issue. The same Conservatives who looked the other way when they voted for tax cuts have always framed the health care debate in terms of how it would be paid for. That was problematic before tax cuts were enacted, but with the ballooning federal deficits they created it’s even more serious now.

With Democrats in control of the House, it may be possible to begin a real debate on our national priorities. Is it okay to enrich corporations and the already wealthy and defer the cost to future generations while letting millions of people sicken and die because they can’t afford health care? Not only has the Trump administration permitted corporations to bloat their coffers while generally reneging on increased jobs and worker benefits, our president rejoices over the decision by a Texas judge that if not reversed on appeal would deprive more than 20,000,000 (twenty million) Americans of health care and insurance coverage.

That’s the Great American Hypocrisy, a shame our generation will bear if we allow it to stand. The message Americans should take from record corporate stock buybacks is that the divide between rich and poor in our country is widening. Not only has this president divided us morally, racially, and by gender, he’s attacking the very existence of middle class families of every shape and color.

Pay attention when the next Congress is seated and the debate begins. Keep your eye on the ball and don’t get distracted by the White House’s ongoing reality TV show.

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2 Responses to Trillion Dollar Stock Buybacks

  1. jbpriddel says:

    Thanks for breaking this down do clearly. Shame on the republicans, shame on Trump and shame on us for taking our eyes off the ball. Joyce

    Sent from my iPhone


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